Issuers want transition rules on terminating advance refundings

WASHINGTON – State and local issuers and other muni groups want House and Senate tax bill negotiators to provide transition relief that would postpone the termination date for advance refundings by six months to a year.

Both tax bills would terminate advance refundings after Dec. 31.

The negotiators, once they are named, will try to reconcile the differences between the House and Senate bills in the next week or two in order to allow each chamber to vote on final passage before the adjournment of Congress at year-end.

Emily Brock, director of the federal liaison center for the Government Finance Officers Association, said Monday that a transition rule for advance refundings is one of the possible outcomes her organization is seeking in a final tax bill.

GFOA and the National Bond Lawyers Association both said they also are continuing their effort – considered a long-shot -- to keep advance refundings.

“I would like to say otherwise, but I am not optimistic,” John Godfrey, senior government relations representative for the American Public Power Association, said Monday on the prospects for keeping advance refundings.

“I remain completely befuddled why a provision that saves money to the federal government is subject to repeal,” Godfrey said, noting that advance refundings reduce tax-exempt income to investors, which in turn, produces more taxable income for the federal government.

The House bill also would terminate private activity bonds and the issuance of New Clean Renewable Energy Bonds and other tax credit bonds after Dec. 31, but the Senate bill would retain them.

“We are asking Congress to keep the current tax treatment for private activity bonds but we go even further,” said Jessica Giroux, deputy director of governmental affairs for NABL. “Due to rumors we heard about watering down PABs, we are specifically asking Congress not to restrict them in the final bill.”

Both bills also repeal the federal deduction for state and local income and sales taxes, retaining only a deduction of up to $10,000 for homeowner property taxes.

Moody’s Investor Service issued a statement Monday labeling the Senate bill as “negative overall for state and local government finances,” but added that “lower federal tax rates for businesses and individuals could result in a modest boost to hiring and consumption.”

Nick Samuels, vice president of Moody’s, said the proposed changes to the state and local tax deduction “would reduce disposable income for many taxpayers, likely outweighing the positive effect of lower federal rates on consumption in many municipalities and states.”

“The SALT change would also reduce financial flexibility by increasing political resistance to tax increases at the state and local level,” Samuels said. “The overall negative effect would be felt most sharply in high-tax states such as California, New York, and New Jersey."

S&P Global Ratings said in a report that with the Senate's passage of its tax bill, "the federal-state fiscal relationship is poised to undergo a transformational overhaul."

Mayors are bipartisan in their opposition to the legislation, according to New Orleans Mayor Mitch Landrieu, who is president of the U.S. Conference of Mayors.

“This bill will severely undermine economic development in cities and towns across the country, add to the deficit, and make our country weaker, not stronger,” Landrieu said.

Mayors are concerned that the repeal of most of the SALT deduction will hamstring their ability to raise revenue and that the Senate bill’s repeal of the federal mandate for all households to have health insurance will swell the ranks of the uninsured by 13 million.

At a meeting of the GFOA's debt committee in Washington on Monday, officials talked about the potential benefits of transition relief to postpone the termination date of advance refundings. It would lessen the disruption that has occurred in the municipal bond market as issuers have rushed deals to market to beat the deadline.

“Transition rules would be very helpful because what we are seeing now is that everyone is in a panic to rush to the market to get the bonds issued prior to Dec. 31,” said Cindy Harris, chief financial officer for the Iowa Finance Authority. "So we’re been seeing the tax exempt rate, the yields that we can get, have been going up.”

Kathy Kardell, debt manager for Hennepin County in Minnesota, said her county has about $1 billion in outstanding debt, half of which has not yet been subjected to an advance refunding.

“We save millions of dollars when we refund bonds,” said Kardell, noting it funds roads, bridges, libraries, courthouses, corrections and public safety.

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